I Feel like there's a fundamental flaw with trading penny stocks that nobody is talking about and it drives me nuts as an active Trader someone who's turned less than $600 into over 10 million. No, my results are not typical, but I mostly did it trading low priced stocks. So I Love low PRC stocks. but I'm not in love with penny stocks when I became a full-time Trader I Tried trading penny stocks and I learned the hard way.

the biggest losses that I had in my career were trading actually Ual penny stocks. So if you've lost money trading penny stocks, you're not alone in this episode. I'm going to share with you the three fundamental flaws with trading penny stocks. and I'm going to share with you What? I do? That's a little bit different that's allowed me to be such a successful.

Trader Now one of the flaws with penny stocks. It's not anything that you and I can control. It's actually a mechanism that Regulators put into place in 1987 that even today has a significant effect on the way these low price stocks trade. So there's a lot to cover.

I've got my whiteboard. we've got screen share. so let's jump into today's episode on trading penny stocks. All right.

So I have two perfect examples: I'm going to share with you. One is from the penny stock today that went up about 200% and the other is from the penny stock yesterday that went up about 300% Yes, we are in a penny stock Hot cycle right now. This began about 2 weeks ago when we had a penny stock That went from about 30 cents a share up to over $11 a share in one day and it caught short sellers off guard. Some of them just got destroyed.

A lot of long traders made some money and there are a lot more Traders out there that could have would have should have wanted to make more money on it than they did. Saw this incredible opportunity that they didn't capitalize on and said to themselves I will not miss the next one And so the next penny stock that is popped up with news has had that many more buyers and it becomes a bit of a self-fulfilling prophecy because Traders are like I don't want to miss the next one so they all buy the next one and then the next one gets a ton of volume starts to go up, but none of them have made a move as big as that one two weeks ago. Nonetheless, 200% or 300% there still a lot of opportunity. I Think we need to make a distinction here between being an investor and being a Trader which one are you now? I'm a Trader but I learned that the hard way.

I started as an investor so to speak because some of my first trades I bought into the hype I bought the penny stock that you know the penny stock alerts that people were emailing out I bought into it and I bought a huge position on a penny stock that I thought for sure was going to be the next one that was going to go to $2 $3 a share and I'd make 30 grand or whatever it was. But as it started dropping as the momentum faded, I kept holding and I kept hoping that it would go back up and it didn't and I lost $155,000 which was a huge amount of money for me at that time. and I learned through that experience and then many more over the years that I wanted to be a Trader I wanted to reduce my exposure risk of holding stocks overnight cuz that felt uncomfortable I wanted to make money consistently I felt that I needed to. well, this was my only job so I really did need to make a little bit of money at least each week, if not every day.

And so that really molded me to become a Trader And the type of Trader that I am is a bit more of a momentum Trader and a scalp Trader where I'm taking relatively quick trades, 5 minute long, average hold time, getting in, getting profit, getting out 5,000 shares, 10 cents that's 500 bucks I do that 10 times in one day and I'm up five grand. And just as an example of that, this is my P&l from right here today. You could see that so $5,000 on the day traded the particular penny stock that I'll show you uh as we get further along in this episode, the thing that I realized is that if I wanted to be an investor, I needed a certain set of skills that I simply do not have I would either need to be like a senator or you know, a congressman or whatever because these guys seem to make a ton of money in the market. or I would need to um, you know, be buddies with like Bill Lman or Warren Buffett or know a bunch of S&P 500 CEOs Well, I'm not in that Circle I'm just a regular guy you know grew up in Vermont I have no connections like that whatsoever.

So what Edge would I possibly have now? Could I do a ton of fundamental research and and maybe find that needle in the Hy stack? Maybe. But it seems to me a lot easier to try to focus on being a Trader focus on using technical analysis using these easily recognizable chart patterns to take a few trades each day, book a little profit, and move on. All right, so that's my strategy. That's the way I trade.

But I don't like penny stocks. Well, this stock is going up 200% in one day, 300% in one day. What? What's not to like about that? There's three things as I already mention and the first is decimalization. So penny stocks any stock below a dollar trades, not just in one cent spread.

So I'll get on the Whiteboard here. So if a stock traded with a 1 cent spread, it looks like um, 85 C by 86 C that would be a 1 cent spread. And that means if you bought 10,000 shares at 85 and sold 10,000 at 86, you'd make a 100 bucks. All right.

Well, that's not how it works with penny stocks below a dollar a share. They actually trade all the way down to the 1/1 100th of a penny. Which means it can trade like that by like that. So what's crazy here is that for this stock to go from 85 to 95, that's only 10 cents, but it's actually 10 increments of 100 that equals 1,000 price increments to get from 85 cents to 95 cents.

I'm not going to draw 1,000, but you get the idea. now. On the other hand, as soon as a stock crosses over $1 a share, 101 by12. now you're back to getting your $100 on that 1ent spread.

And for this stock to go from 101 to 110, it really only is 1, 2, 3, 4, 5, 6, 7, 8, 9, 10 increments of one penny each. And for that reason, as soon as a stock breaks over $1 a share, they tend to move faster. So a stock price between $2 and $4 is going to move move a lot faster in general than a stock price between 20 cents and 4. The thing is, and this is what can be a little bit frustrating.

a stock like the ones that we traded today or the day before that start at 50 cents a share. Well, they have two problems. So the first problem the the first thing I don't like about these penny stocks is the issue with decimalization that below a dollar, they trade down to the one/ 100th of a penny. And the second issue is that these stocks become extremely congested, very crowded.

And that's because in order to make money, you have to buy not just 5 or 10,000 shares. you've got to buy 50,000 100,000 shares. And now you've got a level two where the order book is so stacked with sellers and buyers on both sides that the stock becomes a tug of war. And you don't get those quick 5 to 10 cent moves.

So I like five to 10cent moves because with 5,000 shares I can book 250, you know, to $500 But on a penny stock, you're not going to get 5 to 10 cent moves. Now you could set say Ross Well, no, that's fine, just take your 1 to two cent move, but a 1 to two cent move even though you could do that with a lot of shares. Now you're getting in this position where you're using kind of like a lot of Leverage for a really small sliver. But if that backfires on you, you have a lot of downside exposure because you took such a huge position.

If you happen to have the bad, you know timing Misfortune of getting in right before someone presses the sell order on 500,000 shares, they're going to sweep the book and the stock is going to flush. That's going to be a problem. So there is exposure risk with taking really big size and one of the big problems with these penny stocks is that they become very congested. So problem number one: Decimalization problem number two is congestion and problem number three is the halt levels.

So this is something that's pretty interesting. Uh I Actually, uh, wrote about it today in a blog post. Uh, because I thought it was, uh, that interesting. So let me show you the example of uh, these two stock charts.

So right here we've got um, and let's see, we'll just move this like this just so you can see it better. So on the left we have Inm, which was today's Big Momentum stock. You can see it's up 143% You could see that right there. 143% Uh, I Just crossed it out.

Sorry about that. All right. So um, and then on this side you see Ivo down a 32% on the day. So the halt bands have been a real topic of conversation in 1987 after the stock market Crash, circuit breakers were introduced into the market.

and these circuit breakers are volatility trading halts. So if a stock declines more than 10% in less than 5 minutes, the stock will be halted for a period of 5 minutes. It gives Traders a chance to collect their bearings and most importantly, it's stops highfrequency trading algorithms from spiraling from running away and creating a flash crash. It stops everything in its tracks for a moment 5 minutes.

So the thing is, these halt bands are different on different priced stocks. And to give you a bit more of a description of how these work, let's look at the Whiteboard again. So as a stock is moving up, as it's moving up around, the price action at all times are volatility bands, and these volatility bands are spaced away from the price action. Uh, 10% So for a stock over $3 so for $3 and up, these bands are spaced 10% above the current price and 10% below the current price.

For stocks between 75 and $3 a share, it's 20% and for stocks below 75 cents a share, it's 15 or 75% And this actually presents a really interesting issue that we had today. So today and and this price. The price right here isn't based on the current price right now, it's based on the price. The stock closed at yesterday.

So yesterday Inm which was up 200% Today yesterday it closed at 50. So it's actually down in this, um, tier. Right Here it closed at 50 cents. Which means every 15 cents, the stock is getting halted.

Remember that circuit breaker halts don't work Prett pre-market or after hours, but they work between 9:30 and 400 p.m. regular trading hours. So if we look at the stock chart just for a moment, um, yesterday on Ivoo, you'll notice that pre-market we have this sort of regular trading. It's grinding up.

it's It's very thickly traded. It's very hard to make any money on it. And then at the open, Suddenly it squeezes and halts up. So it trades for like, you know, a minute.

Then it halts up. It's halted for 5 minutes, Then it resumes and it squeezes up and halts Again, it's halted for another 5 minutes, Then it instantly halts down and it's halted for another 5 minutes. And then it halts back up and it's halted for 5 minutes and again for 5 minutes. And then it goes up.

and then it hals down for 5 minutes. And so even though hours were going by, this was spending more of the time being halted than actually trading. And it's because the volatility bands were 15 cents away. So the way these bands work, by the way, is it's the average price over the last 5 minutes and it updates approximately every 30 seconds.

So that's why I have these little lines So these this is the ban for 30 seconds approximately. and then it updates so it's constantly updating to 10% away in the case of a $3 stock or higher, 20% for a 75, C to $3 stock or 7 or 15 cents for something that closed under 75 cents. it's constantly updating that distance from the average price of the last 5 minutes. so it's constantly moving.

Now, in order for a stock to actually be halted, it needs to be pinned at the top of this volatility band for at least 15 seconds and then the stock will get halted for a minimum of 5 minutes. This again, this is giving you a little bit of a Um tutorial of the circuit breaker trading halt thresholds in the volatility bands, but it was. It's been a major issue. So these stocks have been just getting halted left and right, left and right.

And I think this. This is actually what's even more interesting. So let's look back at this example here. All right.

So let's see. so this example here. if we look at this: oops, sorry, Um, there we go. So if we look at this example, Inm yesterday was0 50 cents a share or so.

So today, even though it's at $141 right now, it's going to Halt every 15 cents if if it goes 15 cents within less than 5 minutes It'll halt. So its halt levels are about 15 cents below and 15 cents above the current price a126 and $156 But notice Ino In right here is a similar price. It's at $143 $144 but the halt levels are 113 by 169. Why are the halt bands wider on this stock? We'll notice that this stock is down 30% on the day.

So this stock actually falls into this category right here. because its price at yesterday's close was between 75 C and $3 so the volatility bands are 20% Isn't that odd that you have two stocks that are basically the same exact price, but they fall into different rules for the halt levels. Unfortunately, you know this is one of those sort of little idiosyncratic moments of our current market. The volatility bands are designed to prevent flash crashes, they're designed to protect individual investors, and Traders instill confidence in the market.

But this is an area where where when you have a stock that's halting every 15 cents and spending more of the day being halted than actually trading, it feels borderline untradeable, and it actually feels like as a Trader it's not safe to trade it because at any moment someone could execute a 500,000 share sell order. Boom, it's halted down and you don't have a chance to get out. You're stuck. So on.

the stock that went from 20 cents all the way up to $11 a share I was trading that only pre-market and after hours. During the regular trading day, it was too difficult. So I waited until pre-market after hours when the circuit breaker halts were turned off because that's when it was more fluid. That's when it was trading more naturally.

But even still. I Don't usually like penny stocks because even pre-market they still have the two. The first two issues that I mentioned the issue with a decimalization. so they trade in with really tight spreads and they don't move very quickly so it's hard to SC SC 10 15 cents on it and then number two.

they're very thickly traded. These are our two, the two main issues and then the circuit breaker halt issue. That for me, just kind of puts it over the top. So if we look at my own metrics, you know I I I Always draw on my metrics because this tells me what I'm good at.

So what my metrics show is that my profitability predominantly I mean really in a big way is on stocks between five and $10 Do I make money under five? Yes, Do I make money under two Some, but not a lot. Now this is. this is just for um, this period of time. Right now we can clear this out and we'll see if I clear this out and we show it for all time.

Um, you're going to see it. it. It's a little bit less. Um, it's a little less distinctive.

Let me just scroll back so you can see right here. this is for this is for all time. All right. So so for all time time, it's still predominantly in the 5 to 10 area.

This year was what we were looking at before is even more so. and yeah, under $2 $350,000 I've made $350,000 on over $10 million in profit 3 and a half% So I could just say I don't need to ever trade penny stocks and I could say I don't need to ever trade a stock over $100 a share. but you know GameStop and a few others I traded and I made some good money on. so you know it's okay to trade a little outside this Zone But I have found consistently that trading stocks that are a little bit more expensive for me I It feels simpler.

the halt levels. You know, if it's above $3 the halt levels are 10% away. So that means a $5 stock can go up a solid 50 CS before running into a halt. And it's it's more than just going up 50 cents cuz again, it's it.

It would have to go up 50 cents in 1 minute to get halted. If it goes up 30 cents, it's not going to get halted and then because the halt level updates because of recent price action. every 30 cents that halt is going to keep climbing higher so you can have stocks that go up 3, 4, 500% and they don't get halted once. But it's usually the ones that start above $3 that give that type of cleaner price action and that is more tradable.

So I You know to me, there's this big flaw with penny stocks that you've got the issue. With decimalization, you've got the issue with them being super crowded. and then number three. you've got these crazy halt issues which have been really noticeable in the last couple weeks.

these backto backto back halts. So my Approach is that if I'm going to trade them, I'm going to trade them pre-market or after hours. and in general I'm going to focus on trading stocks closer. you know, between $5 and $10 because that's what my metrics say is where I'm going to make the most money if you found this interesting.

I Hope you hit the thumbs up and make sure you tune in for the next episode real soon.